Indian Fiscal Budget 1997-98: Full Text

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Budget 1997-98

Speech of

Shri P. Chidambaram

Minister of Finance

 

28th February, 1997

 

PART B

 

  1. Let me preface my tax proposals by saying that I have set for myself the goal of augumenting the net tax revenues of the Central government by a healthy 15-16%; I believe that through the measures proposed by me we will attain this goal.
  2. I shall begin with my direct tax proposals.
  3. The CMP affirms that "the United Front government will continue with tax reforms and take other steps to augment revenues legitimately due to the government and to curb tax evasion." I believe that a good tax policy should aim at moderate rates, a wider tax base, simpler procedural rules and securing greater compliance. Households and the corporate sector are our best savers; we must reward them. From another point of view, however, the tax to GDP ratio for the Central government, which currently is only around 10.5 per cent, needs to increase to sustain the needs of public investment and social sector expenditure. Moreover, the proportion of direct taxes should increase in the total tax revenues of the government.
  4. It is inexplicable that in a country of over 900 million people, only 12 million people are assessed to income-tax and, what is worse, only about 12,000 assessees are in the tax bracket of income above Rs.10 lakhs. I intend to make a beginning in widening the tax net by an amendment of Section 139 of the Income-tax Act. My proposal is that residents of large metropolitan cities who satisfy any two of the following economic criteria, namely, ownership of a four-wheel vehicle, occupation of immovable property meeting certain prescribed criteria, ownership of a telephone and foreign travel in the previous year, should normally fall within the taxable slabs and should voluntarily file their tax returns. I appeal to them to cooperate in our endeavour. If anyone fails to do so, the Income-tax Department would serve upon him a notice obliging him to file his return so that taxes, if due from him, could be collected. Those who live in apparent comfort must have the satisfaction of finding their names in the records of the Income-tax Department.
  5. With the same objective, I also propose to introduce a new Estimated Income Scheme for retail traders. The scheme will apply to persons engaged in the business of retail trade of any goods or merchandise having a total turnover of less than Rs. 40 lakhs. A trader with a turnover of less than Rs. 8 lakhs will stand exempted, given the present exemption limit. The income of the trader will be estimated at 5 per cent of the total turnover. Assessees who file a return showing income less than 5% of turnover will be required to maintain books of account and get their accounts audited.
  6. With the aforesaid steps, the existing presumptive scheme under section 115K, popularly known as the Rs. 1400 scheme, which has not yielded the desired results, is being discontinued.
  7. Members may recall that, last July, I had reduced the income-tax rate for the first income slab from 20 per cent to 15 per cent. It was, I believe, a step in the right direction. If we look at comparative income-tax slabs in other developing Asian countries, it will be evident that tax rates in India are still high and constitute an important reason for tax evasion. It is now widely accepted that moderate rates of taxation encourage savings, foster growth and motivate voluntary compliance. I have received wise counsel from many Hon’ble Members. I have, therefore, decided to lower the rates of personal income-tax across-the-board in a significant manner. The current rates of 15, 30 and 40 per cent are being replaced by the new rates of 10, 20 and 30 per cent. The rate will be 10 per cent in the first slab of Rs.40,000 to Rs.60,000, 20 per cent in the slab of Rs.60,000 to Rs.150,000 and 30 per cent for all incomes above Rs.150,000.
  8. The new tax rates are so moderate that there is now little justification for increasing the exemption limit. However, salaried persons deserve some relief. I, therefore, propose to increase the limit of standard deduction to Rs.20,000, which will, henceforth, apply uniformly to all salaried taxpayers. An employee drawing a salary of Rs.75,000 per annum and contributing 10 per cent thereof to the provident fund would have to pay no tax at all.
  9. During the last meeting of the National Development Council, a suggestion was made that the government should think of a scheme to harness ‘black money’ for productive purposes. I have balanced the economic and the ethical arguments. I have considered various options. And I believe that the time is opportune to introduce a Voluntary Disclosure Scheme. This would be a simple scheme where, irrespective of the year or the nature or the source of the funds, the amount disclosed, either as cash, securities or assets, whether held in India or abroad, would be charged at the revised highest rate of tax. Interest and penalty will be waived. Immunity would be granted from any action under the Income-tax, Wealth tax and the Foreign Exchange Regulation Acts. The date of commencement of the scheme will be notified separately, but the scheme will end on December 31, 1997. Of the total resources which can be secured under the Scheme, a substantial part - 77.5 per cent - will accrue to the State governments. I hope they will cooperate in our endeavour in attracting people to avail of this new opportunity being offered to those who have shied away from paying legitimate taxes in the past. The share which becomes available to the Central government will go entirely towards financing the Basic Minimum Services programme and infrastructure needs.
  10. I also propose to give some further relief to our senior citizens. I propose to increase the rate of rebate available to them to 100 per cent, from the existing 40 per cent, subject to a limit of Rs.10,000. Thus, a senior citizen having an income upto Rs.1 lakh would not have to pay any tax. Senior citizens with higher incomes will also enjoy this exemption limit but will be taxed above the threshold level of Rs.1 lakh.
  11. Responding to demands from Chief Ministers, I propose to amend section 80G of the Income-tax Act to provide for 100 per cent deduction in respect of donations made to the Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund.
  12. Turning to corporate taxes, I had in my last budget reduced the rate of surcharge from 15 per cent to 7.5 per cent and had expressed the hope that I would take a similar step in my next budget. I propose to abolish the balance surcharge on companies.
  13. Corporates should be encouraged to undertake new investments. Hence, I propose to reduce the tax rate applicable to both domestic and foreign companies. The rate for domestic companies will now be 35 per cent and for foreign companies 48 per cent. The reduction in the corporate rates, apart from better compliance, should impart an added momentum to the growth process, create multiplier beneficial effects all around and also attract greater foreign investment.
  14. There has also been a demand from the corporate sector that the tax rate of 30 per cent on royalty and technical services fees payable to foreign companies is too high and acts as a hindrance to the transfer of technology. I, therefore, propose to reduce this rate to 20 per cent.
  15. I have received requests from non-resident Indians that the capital gains tax rate in their case arising on transfer of securities should be at par with the rate applicable in the case of FIIs. I see merit in their demand and, accordingly, propose that the rate be reduced from the existing 20 per cent to 10 per cent.
  16. The Minimum Alternate Tax (MAT) on companies, which was introduced last year, has been the subject of extensive debate. A large number of representations have been received to repeal—or review—the provisions. The economic rationale for MAT has, I am afraid, not been altered and I am unable to accept the request that the provision introduced last year be totally withdrawn. However, there is a case for a review of the manner in which the tax is charged and collected. I, therefore, propose to make the following changes in the provisions of MAT :-

 

    1.  
    2. Export profits will be exempt from MAT and will be eligible for full deduction under section 80HHC.
    3.  
    4. A system of credit will be introduced in respect of the payment of MAT. When a company pays MAT, the tax credit earned by it shall be allowed to be carried forward for a period of 5 assessment years and, in the assessment year when regular tax becomes payable, the difference between the regular tax and tax computed under MAT for that year will be set off against the MAT credit available. Thus, at the proposed new rate of corporate tax, every company including the zero tax companies, would have to pay income-tax of not less than 10.5 per cent on its book profits.

 

  1. Another area of vigorous debate over many years relates to the issue of tax on dividends. I wish to end this debate. Hence, I propose to abolish tax on dividends in the hands of the shareholder.
  2. Some companies distribute exorbitant dividends. Ideally, they should retain the bulk of their profits and plough them into fresh investments. I intend to reward companies who invest in future growth. Hence, I propose to levy a tax on distributed profits at the moderate rate of 10 per cent on the amount so distributed. This tax shall be an incidence on the company and shall not be passed on to the shareholder.
  3. In order to encourage investments in government securities, called gilts, I propose to abolish Tax Deducted at Source (TDS) on such securities. I also propose to include gilts for the higher deduction limit of Rs.15,000 under section 80L of the Income-tax Act as is available in respect of income received from the units of UTI or approved mutual funds.
  4. I have already announced that Telecommunication will qualify as an infrastructure. I, therefore, propose to extend the following benefits to this sector :-
    1.  
    2. Tax holiday under section 80 IA;
    3.  
    4. Amortisation of licence fees; and
    5.  
    6. Inclusion of investments made in debentures and equity shares of a public company providing telecommunication services for the purposes of tax rebate under section 88.
  1. In order to encourage the development of tourism infrastructure, I propose to give a deduction of 50 per cent of the profits in respect of new hotels which are located in a hilly area or a rural area or a place of pilgrimage or a specified place of tourist importance. These hotels will also be exempted from the levy of expenditure tax. In respect of hotels located in other places, excluding the four metropolitan cities, the deduction shall be only 30 per cent of the profits.
  2. Taxing financial intermediation goes contrary to the canons of sound public finance. Today, an interest-tax at the rate of 3 per cent is levied on the interest income of lending institutions, including banks and NBFCs. I propose to reduce the levy to 2 per cent and I hope to eliminate this levy progressively. This will help to keep down the cost of borrowing.
  3. As a measure of simplification, I propose to amend Section 37 of the Income-tax Act to provide for the removal of artificial disallowances on account of advertisement, travelling, hotel expenses, entertainment expenses etc. incurred for legitimate business purposes.
  4. I have also decided to eliminate a number of exemptions which continue to remain on the statute book and have since lost their relevance or rationale. These include exemptions and deductions under sections 10 (15A), 10 (26AA), 80GG and 80JJ.
  5. Now, I turn to my indirect tax proposals.
  6. In relation to indirect taxes the CMP has stipulated: "The progress towards the goal of bringing India’s tariffs in accord with world levels will be measured and calibrated."
  7. On more than one occasion, I have stated that we would achieve the average level of tariffs prevalent in ASEAN countries by the turn of century. This will give time to Indian industry to adjust to these changes. This year’s proposals should be seen in this background.
  8. I propose to reduce the peak rate of customs duty from 50% to 40%.
  9. High levels of customs duties on capital goods are inconsistent with our policy of attracting the best technology. Greenfield investments in large projects should be globally competitive. I have tried to harmonise the needs of Indian industry with the requirements of the capital goods sector. I, therefore, propose a modest reduction in duty on capital goods from 25% to 20%. This reduced rate of 20% will also apply to project imports. Over the next two to three years these rates would need to be further adjusted to conform to levels prevalent in other developing Asian countries.
  10. I also propose to exempt plans, designs and drawings from the levy of customs duty.
  11. The customs duty on several inputs for the steel industry is being reduced. I propose to reduce the duty on coking coal (of ash content below 12%) from 5% to 3% and on coking coal of higher ash content, as well as coke, from 20% to 10%. I also propose to reduce the duty on nickel from 20% to 10%, on ferro alloys from 25% to 20% and on re-rollable steel scrap from 30% to 20%. All these measures should benefit the steel industry to reduce its cost of production.
  12. Iron and steel products at present generally attract customs duty at 30%. I do not propose to make any major changes in the duty structure this year. However, I propose to reduce the duty on Cold Rolled Coils of iron and steel from 30% to 25% to help the engineering industry. I further propose to reduce the duty on ships brought for breaking from 10% to 5% and on pig iron from 20% to 10%.
  13. I propose to reduce the duty on non-coking coal from 20% to 10%. This will help the power sector.
  14. Chemicals constitute vital inputs for several down- stream industries including the small scale sector. I propose to reduce the duty on organic and inorganic chemicals from 40% to 30% . I also propose to make the following reductions on certain essential chemicals:
  15. • On linear alkylbenzene, from 30% to 20%.

    • On methanol, from 30% to 20%.

    • On naphthalene, from 30% to 20%.

    • On phenol, from 30% to 25%.

    • On catalysts, from 30% to 25%.

  16. I also propose to reduce the customs duty on dyes, pigments, paints and varnishes, glues, enzymes and modified starches from 40% to 30%. These reductions will significantly benefit our textile industry.
  17. Mr. Speaker, Sir, the scheduled dismantling of quantitative restrictions under the Multi Fibre Agreement will expose all textile exporting countries to stiff competition. The Ministry of Textiles have created a "Technology Upgradation Fund" for both the textile and jute industries to enhance the competitive efficiency of these sectors. Our textile industry has, therefore, to upgrade its technologies in the shortest possible time. Last year, I had reduced the customs duty on several kinds of textile machinery to 10%. In order to improve the quality of our garments for exports, this year I propose to add some more processing machines to this category. However, to mitigate any adverse impact on domestic manufacturers, I have decided to allow them to import the components and parts of these machinery at a concessional duty of 10%.
  18. As a relief to the woollen textile industry, I propose to reduce the import duty on apparel grade wool from 25% to 20%, on wool waste from 30% to 20% and on woollen and synthetic rags from 30% to 25%. On flax fibre, I propose to reduce the duty from 30% to 20%.
  19. In order to conserve our forest resources, I propose to fully exempt wood logs, fuel wood, wood chips, etc. from customs duty.
  20. The spread of "Information Technology" has radically altered conventional wisdom on growth strategies. I propose several measures to encourage this industry and to reduce costs. These include:
  21. • Full exemption to computer software.

    • Reduction of duty on computer parts, other than populated printed circuit boards, from 20% to 10%.

    • Reduction of duty on cartridge tape drive and digital video disc drive from 20% to 10%.

    • Reduction of duty on populated printed circuit boards from 30% to 20%.

    • Reduction of duty on integrated circuits from 20% to 10%.

    • Reduction of duty on colour monitor tubes from 20% to 10%.

    • Reduction of duty on colour picture tubes from 35% to 30%.

    • Reduction of duty on parts of cellular telephones and pagers from 30% to 20%.

    • Reduction of duty on telecom equipment from 40% to 30% and on their parts from 30% to 20%.

  22. Ham operators are presently eligible to import specified equipment upto a value of Rs.50,000 at a concessional rate of duty. I propose to raise this limit to Rs.75,000.
  23. I propose to reduce the duty on watch parts and movements from 50% to 25% and on watch cases of base metals from 50% to 30%. I also propose to reduce duty on horological materials from 20% to 10%. This will help our watch industry to further enhance their quality.
  24. We are all concerned about the menace of growing pollution. In order to help reduce the cost of CNG kits, I have decided to reduce the customs duty on such kits and their parts from 10% to a modest 5%. Similarly, I propose to reduce the customs duty sharply on catalytic converters and their parts to 5% from the existing rate of 25%.
  25. To improve the quality of medical care, I propose to reduce the import duty on medical equipment from 30% to 20%; on linear accelerators of 15 MeV and above used for cancer treatment from 10% to 0%; and on ophthalmic blanks for making spectacle lenses from 50% to 20%.
  26. To promote tourism, I propose to reduce the import duty on specified equipment required for hotels from 35% to 25% and on specified speciality food items used by foreign tourists from 50% to 25%.
  27. I also propose to give some relief to the film and photographic industry by reducing the import duty on cine films and other photographic films from 30% to 25% and on parts of cameras from 50% to 25%.
  28. I propose to reduce the customs duty on baggage from 60% to 50%.
  29. I now come to my proposals on central excise.
  30. Our excise structure is far too complex. Till some time ago, we had a multiplicity of rates, innumerable end-use exemptions and other distortions. Considerable simplification has taken place. Last July, I promised that within three years we shall have a four rate tax structure. I find that, in the first instance, it is necessary to reduce the dispersion in excise rates. I believe that we can eventually gravitate towards a mean rate around 18%. With this objective in view, I have introduced three new rates, namely, 8%, 13% and 18%. In the process I have done away with the rates of 20% and 10% (except in the case of some petroleum products). In the interest of revenue, I have perforce to continue, for the time being, the rate of 15% which will apply to metals and a few other commodities.
  31. However, the excise duty structure is still punctuated with many exemptions. All commodities, with some unavoidable exceptions, should be subject to excise duty at a minimum rate. I propose to undertake this exercise in the next year’s budget.
  32. Cotton yarn will continue to bear an excise duty of 5% only.
  33. I propose to withdraw the exemption in a few cases like jams, jellies, sauces and soups where I propose to impose a nominal duty of 8%. Similarly, I propose to levy a duty of 8% on pens and ball point pens exceeding a value of Rs.100 per piece and on non-power sun glasses. However, writing ink will be free from excise duty.
  34. On a number of items of mass consumption like biscuits, sugar confectionery, laundry soap, tooth paste, tooth powder, kitchen and tableware of glass, and clocks and watches of a value upto Rs.600 per piece, I propose to reduce the excise duty from 10% to 8%. A rate of 13% would be applied for watches and clocks above Rs.600 per piece and other items like machinery and parts, tyres and tubes of two-wheeled motor vehicles, fluorescent tubes, and computers and parts thereof. A reduced rate of 13% will also apply to X-ray films, sanitary towels, napkins for babies and similar sanitary articles.
  35. In respect of a large number of products, I propose to reduce the excise duty by percentages ranging from 2% to 7% and apply the mean rate. Accordingly, the mean rate of 18% would be applicable to many commodities including cocoa and cocoa preparations, instant coffee, sherbats, organic and inorganic chemicals, paints and dyes, electric wires and cables, toilet soaps, detergents, articles of leather, synthetic rubber, fibres and blended synthetic yarn, paper and paper board, plywood,travel goods and a host of consumer durables.
  36. Agricultural and horticultural machinery are fully exempt from excise duty. I propose to extend the exemption from excise duty to milking machines, dairy machinery and their parts.
  37. In order to revive and give a thrust to the ailing jute industry, I propose to fully exempt all jute and jute products from excise duty.
  38. At present, import of equipment and consumables by recognized research institutions is exempt from customs duty. In the interest of the domestic producer, I propose to allow the purchase of indigenous equipment and consumables by such institutions free of excise duty.
  39. I also propose to reduce the duties of excise on certain items in order to bring about a more balanced excise structure on the whole. The changes proposed are:
  40. • Reduction of duty on taxis and cars for the physically handicapped from 30% to 25%.

    • Reduction of duty on polyester filament yarn from 40% to 30%.

    • Reduction of duty on cosmetics and toilet preparations from 40% to 30%.

    • Reduction of duty on glazed tiles from 30% to 25%

    • Reduction of duty on airconditioners from 40% to 30%.

  41. Mr. Speaker, Sir, smoking in public is banned in Delhi. The fight against cancer and respiratory diseases continues. My contribution will be to increase the excise duty on non-filter cigarettes, not exceeding 60 mm in length, popularly called mini cigarettes, from Rs.75 per thousand to Rs.90 per thousand. I have also increased the excise duty on other categories of cigarettes. The increases range from Rs.20 to Rs.70 per thousand. There has been no increase in the excise duty on biris since 1993. I, therefore, propose to increase the excise duty on biris from Rs.5 per thousand to Rs.6 per thousand. The impact of this duty change on the retail price would only be 2 paise for a bundle of 20 biris. As regards cigarettes, the increase would be 15 times more for every mini cigarette.
  42. The small scale sector makes an important contribution to our overall production, provides gainful employment and also contributes to our export effort. It is the declared policy of this Government to free the small scale industry from the rigours of cumbersome procedures. In line with this objective, I have radically simplified the scheme of excise duty concessions for the small scale units. I intend to continue the full exemption from duty on clearances upto Rs.30 lakhs in a financial year. Thereafter, a small scale unit would be required to pay a flat rate of excise duty on clearances beyond Rs.30 lakhs and upto Rs.100 lakhs, if the small scale unit does not avail of any modvat credit on duty paid inputs. The flat rate of duty will be 3% ad-valorem on clearances between Rs.30 to Rs.50 lakhs and 5% ad-valorem on clearances between Rs.50 to Rs.100 lakhs. The flat rate will apply for all specified goods to which the small scale exemption scheme is applicable. In the revised scheme of exemption, the small scale units will not be required to maintain complicated records for availing modvat. They will also not be required to determine the classification of goods.
  43. In order to curb avoidance from payment of duty, I have decided to exclude a few items like cotton yarn and texturised man-made yarn from the purview of the SSI exemption scheme.
  44. Mr. Speaker, Sir, while it is our policy to moderate the tax rates and simplify procedures, the government is equally committed to curb evasion of taxes. It is reported that in some sectors, like induction furnace, steel re-rolling mills etc., evasion of excise duty is substantial and the production is not being reported correctly. I propose to tackle this problem by introducing collection of excise duty on the basis of their production capacity. Suitable legislative changes in the excise law for enabling the implementation of the aforesaid change are under consideration. The details of the proposals would be submitted to this House in due course.
  45. The average citizen consumes a basket of commodities. As a result of my proposals — some increases and many reductions — I believe the basket will carry a significantly lower tax burden.
  46. The services sector contributes nearly 40% to the GDP. ‘Services’ are products as much as ‘manufactured goods’. Both must bear taxes. Hence, I propose to extend the service tax to cover a number of well known services like:
  47. • Transportation of goods by road;

    • Consulting engineers;

    • Custom house, Steamer and Clearing and Forwarding agents;

    • Air travel agents, tour operators and car rental agencies;

    • Out-door caterers, pandal contractors and mandap keepers;

    • Man-power recruitment agencies.

  48. The proposals on service tax are estimated to yield a revenue of Rs.1200 crore in a full year. However, for the financial year 1997-98, I am taking credit for Rs.900 crore. I wish to inform the House that in order to improve our national highways, I propose to utilise the bulk of the proceeds realised from service tax on transportation of goods by road to augment the resources of the National Highway Authority.
  49. On the conventional basis, my proposals relating to reduction in customs duties are estimated to result in a loss of Rs.2625 crore in a financial year and, in the case of excise duties, my proposals are broadly revenue neutral. However, the buoyancy and the growth momentum that would be imparted to the economy would more than compensate for our losses computed through the conventional calculations.
  50. I now have to say something on behalf of my colleague the Minister of Communications who has made a statement earlier today. A revision of tariffs for some postal services has become unavoidable. However, in doing so, we have kept in view the interest of the common man and the role of postal services in meeting wider social obligations. While there is no change for Registered Newspapers, the price for ordinary Post Card is being raised to 25 paise and printed Post Card to Rs.1.50. The price for Inland Letter is also being raised from 75 paise to Re.1 and for Envelope from Re.1 to Rs.2. Certain other changes are also being effected which is explained in the Memorandum circulated alongwith the budget documents. The changes will take effect from a date to be notified later. The proposed revisions are estimated to yield an additional revenue of Rs.367 crore in a full year and Rs.305 crore during 1997-98. This modest increase is necessary for the development of postal services and in partially bridging the deficit on the numerous services being provided by the Postal Department.
  51. Copies of notifications giving effect to the above changes in customs and excise duties will be laid on the Table of the House in due course.
  52. Mr. Speaker, Sir, as I come to the end of my labours, let me look at the final outcome. The revenue deficit in 1997-98 is placed at Rs.30,266 crore or 2.1% of GDP. The fiscal deficit comes to Rs.65,454 crore which is 4.5% of GDP. I have not wavered in my commitment to continue on the course of fiscal correction. With the support of this House, and as promised in the CMP, I hope to bring the fiscal deficit under 4% in the next budget.
  53. Our goal must be to achieve rapid and broad-based growth which alone can ensure higher employment, better living standards and a humane and just society. The challenges that we face today are not unique to India. Other countries, including our friends in Asia, have faced similar challenges. Japan showed the way. Other Asian countries are surging ahead. And, finally, there is the example of China, powering its way to becoming the second largest economy in the world. These countries have shown that with courage, wisdom and pragmatism they can find their rightful places in the world.
  54. Deng Xiao Peng, to whom we paid homage a few days ago, once said, "From our experience of these last few years, it is entirely possible for economic development to reach a new stage every few years. Development is the only hard truth." India’s economy has also reached a new stage. Our beloved India is far stronger today than she was six years ago.
  55. I would appeal to this House, and to the Indian people, to heed the call of Gurudev Rabindranath Tagore:
  56. Desha desha nandita kari mandrita tabha bheri,

    Aashilo jata birabrinda aashana tabha gheri.

    Deen aagata oyi, Bharat tabu kayi?

    Shay ki rahila lupta aaji shaba-jana-paschatay?

    Louk bishwakarmabhar mili shabar shathay

    ( Thy call has sped over all countries of the world

    And men have gathered around thy seat.

    The day is come; but where is India?

    Does she still remain hidden, lagging behind?

    Let her take up her burden and march with all.)

  57. Mr. Speaker, Sir, with these words, I commend the Budget to this august House.

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